Which Royalty and Streaming Companies Look Undervalued?
Royalty and streaming companies
The business models of royalty and streaming companies are quite different from those of other precious metals miners (RING) (SIL). Unlike other precious metals companies, royalty companies don’t own mines. They make upfront payments in return for the purchase of fixed percentages of future silver or gold mine production.
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As mine owners deliver precious metals to royalty and streaming companies, additional payments are made to them. Thus, their correlations to gold prices are lower than miners’ correlations.
FNV has highest multiple
Due to their more stable income streams, royalty and streaming companies usually trade at higher multiples than miners. As the above chart shows, they also enjoy higher EBITDA margins than their mining peers.
Of the four major streaming companies we’ll discuss in this article, Franco-Nevada (FNV) has the highest forward EV-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of 23.8x, which implies a premium of 39% to its peers. The premium, however, seems justified given its superior growth profile, strong balance sheet, diversified production base, and a strong pipeline.
Silver Wheaton (SLW) is trading at a multiple of 16.7x. Its discount to FNV is mainly due to its lower production growth. Some of its streams are facing problems such as Barrick’s Pascua Lama project. Moreover, its balance sheet may not be able to support a major acquisition going forward, which could restrict its growth options. In addition, a taxation issue has overshadowed its valuation for quite awhile. Any resolution to this issue could result in a major re-rating of its stock.
Royal Gold’s (RGLD) multiple is similar to that of SLW at 16.6x. The company has diversified significantly in the last one to two years. However, it’s worth keeping an eye on as another accretive acquisition could provide a further catalyst for the stock. Until then, its valuation could be more or less full.
Sandstorm Gold (SAND) is a smaller company compared to its peers, and it’s trading at the lowest multiple of 11.3x. It announced a new deal on April 26, 2017, which sent its share price down 10% in a single day. This deal will create a mid-tier royalty company with a diversified portfolio of assets. This transaction has added operational risk to the company’s profile. Until the company provides evidence of shareholder value through this deal, the valuation is unlikely to go any higher.